The median separate account manager in Pensions & Investments' Performance Evaluation Report returned 22.1% for 1996, lagging the Standard & Poor's 500's 23%.
And while small-capitalization stocks and small-cap managers overall trailed large-cap stock indexes in 1996, six of the top 10 managers for the year in PIPER are small- or midcap managers.
The median PIPER small-cap equity manager returned 21.9% for the year, while the median large-cap manager returned 22.4%. The Russell 2000 Index, a small-cap equity index, was up 16.5%, and the Russell 1000, a large-cap index, was up 22.%.
During the fourth quarter, the divergence of returns between large- and small-cap managers was even greater. The PIPER small-cap median manager returned 4.9% for the quarter, while the median PIPER large-cap equity manager returned 7.7%. The Russell 2000 returned 5.2%, while the S&P 500 and Russell 1000 returned 8.3% and 8% respectively.
Despite the attention given to U.S. equity manager returns, managers of non-U.S. equity portfolios also posted solid returns in 1996.
The median PIPER international manager was up 12.5% in 1996 and 3.9% in the fourth quarter. The Morgan Stanley Capital International Europe Australasia Far East Index was up 6.4% and 1.7%, respectively, for the same periods.
The highest ranking PIPER U.S. equity composite for 1996 was State Street Research and Management Co.'s energy composite, which returned 77.3%. State Street's energy composite also was ranked second for the quarter, with 18.9%, and seventh for the three years ended Dec. 31 with an annualized 30%.
Daniel Rice, senior vice president for Boston-based State Street, said companies in the energy sector received better pricing multiples from the market in 1996, relative to cash flows, while earnings on those companies were growing.
Price-to-cash flow multiples climbed to six from four over the course of the year, which would have produced a return of 33%, Mr. Rice said. Coupling that with the 20% earnings growth in the sector means an investor buying just the sector would have been up more than 50%.
State Street's portfolios benefited from consolidation in the industry; five of its top 15 holdings in the year were bought out, although that's not why State Street had purchased them, he said.
In fact, all three of State Street's top three holdings merged in the year: Phoenix Resource Cos., ENSERCH Corp. and Global Natural Resources.
Other stocks in State Street's energy-focused portfolios involved in mergers were Nowsco Well Service Ltd. and Landmark Graphics Corp.
Mr. Rice said State Street's managers still are positive on the sector.
"The sector is still cheap relative to the market," he said. The S&P 500 is priced at 10 times expected cash flow, while the energy sector is still at eight times, he said.
The only thing holding back the shares is apprehension over a possible drop in oil prices. "There is that fear, and that's being reflected in the multiple of the stocks," he said.
Some big State Street holdings now are Nuevo Energy Co., Seagull Energy Corp. and TransTexas Gas, he said.
The second-highest ranking strategy for the year came from Oppenheimer Capital, New York, for its concentrated value equity composite.
The concentrated value strategy, which involves taking relatively large positions in as few as 10 stock names, returned 63.3% for the year, despite a less-than strong showing in the quarter.
The managers in the strategy try to avoid short-term plays.
"We're long-term investors," said Jeff Whittington, portfolio manager.
Long term, the Oppenheimer strategy resulted in a sixth place ranking among all PIPER separate account managers for the three years ended Dec. 31, with an annualized 33.1%. And for the five years, the firm ranked eighth, with an annualized return of 26.6%.
Some of the largest current holding in the strategy are LucasVarity PLC, Chesapeake Energy Corp. and UCAR International.
The third ranking firm for the year ended Dec. 31 was ABB Investment Management Corp.'s equity portfolio management account, a small-cap growth strategy.
The strategy returned 54.7% in 1996 for Stamford, Conn.-based ABB. It also returned an annualized 33.7% for the three-year period, ranking fourth.
A small-cap value strategy managed by Manley Fuller Asset Management L.P., New York, was the fourth ranked strategy for 1996, posting 50.7%.
Manley Fuller's small-cap value strategy performed well in the fourth quarter as well, ranking third with 16.2%.
James Manley, president, said the firm looks for stocks that have declined in price and were disliked by the market but now show stabilization in earnings and price.
In 1996, companies in offshore energy drillers and oil exploration and production performed well for Manley Fuller, as did some aerospace-related companies, he said.
Drilling stocks that performed well included Noble Drilling Corp., Global Marine, Marine Drilling Cos. and Patterson Energy. Winning oil exploration and production company stocks included Unit Corp., Swift Energy Co., Chieftain International Inc. and Cross Timbers Oil.
Oil-related companies had been out of favor since the early 1980s, he said. But 1995 was a good year and 1996 was a super year.
The aerospace industry peaked in 1990 and bottomed out in 1995. Since then, companies have been cutting costs and improving productivity.
In 1996, Manley Fuller benefited from positions in Fairchild Corp., BE Aerospace, Banner Aerospace and Hexcel Corp., Mr. Manley said. Stocks that were partial plays on that trend were Oregon Metallurgical Corp. and RMI Titanium Co., he said.
In 1997, Manley Fuller's managers are positive on some furniture manufacturing companies, which have been out of favor for a number of years.
Furniture companies they like include O'Sullivan Industries, Ameriwood Industries International, LADD Furniture, Shelby Williams Industries and Rowe Furniture, he said.
Furniture companies make up almost 5% of Manley Fuller portfolios, Mr. Manley said.
The sixth-ranked PIPER composite for the year was the midcap strategy managed by Forstman Leff Associates Inc., New York.
Forstman Leff's midcap style returned 48.7% in 1996; for the quarter, it earned the ranking of ninth with 13.8%.
Forstman Leff's managers benefited from some retail names like CompUSA, which quadrupled in price, and Price/Costco, which doubled, said Sarah Kaye, senior vice president in client relations.
EMC Corp. is an Internet play based on the use of its computer open systems technology on the Internet, she said.
The average capitalization in the strategy is about $2.5 billion, and managers will consider companies with capitalizations as large as $7.5 billion, Ms. Kaye said.
Forstman Leff is bullish in general on midcaps for 1997, based in part on its view that the relative pricing of midcaps lags larger-cap stocks.
"There's a huge valuation disparity going on," Ms. Kaye said.
One stock owned in 1996 and still liked for 1997 is Barnes & Noble Bookstores. Ms. Kaye said the share price didn't do much in 1996, but could do well in 1997. It has a p/e ratio of 17, based on expected 1997 earnings, but could have a p/e of 40 based on its growth rate, she said.
"We see a huge potential for a (p/e) multiple expansion," Ms. Kaye said.
The sixth-ranked PIPER separate account manager in 1996 was Conseco Capital Management Inc. for its equity growth composite.
The style returned 46.2%. Conseco's philosophy is bottom-up, focusing on companies with potential for high growth and good management but with shares trading at reasonable prices, said Thomas Pence, a vice president and senior equity portfolio manager for the Carmel, Ind., firm.
Conseco managers also seek companies that have some type of proprietary advantage, he said.
Managers get as close as they can to companies. In some cases, they'll contact vendors and field sales representatives for information. The strategy worked in 1996.
"Last year we were able to find a number of terrific companies," Mr. Pence said. Some of those companies were Miller Industries, The Finish Line, Brightpoint Inc. and Tosco Corp.
Mr. Pence said industry plays aren't a part of Conseco's strategy; instead managers will focus on trying to find companies that will outperform.
"We're looking for really terrific earnings growth," he said.
For the coming year, Conseco managers are still positive on Miller Industries' prospects, as well as a company called Family Dollar Stores, which operates retail outlets with most items priced at $1.
Family Dollar has become the retailer of choice for low-end consumers, he said. The stock was trading near $22 in early February, but could go as high as $30 by the end of the year, he said.
Another company Conseco managers like is MICROS Systems, which provides hardware technology - and, increasingly, software - to restaurants and airport vendors.
He said market sentiment on MICROS is fairly negative because of recent earnings disappointment, making the pricing attractive. But the company is relying more on sales of its software, which is expected to do well. Plus, software carries higher margins than hardware, its traditional base, Mr. Pence said.
Neumeier Investment Counsel, Carmel, Calif., finished seventh for the year, reporting a return of 43.7% for its small-cap value composite.
The same composite finished fifth for the quarter with 15.4%.
Finishing eighth for the one-year period was Eagle Asset Management, St. Petersburg, Fla., with 42.8% for its small-cap equity composite.
Bert Boksen, senior vice president and portfolio manager for Eagle, said that while it was a relatively tough year for small caps in general, his firm was able to garner some positive returns from the energy sector and some unexpected buy-outs.
Mr. Boksen noted his firm's performance in 1996 came without a lot of high-tech exposure.
Like Manley Fuller, they owned Marine Drilling Cos. and another energy services firm, Precision Drilling Corp.
Geneseco, a shoe manufacturer that includes the Johnston & Murphy brand, is a company that has done well for Eagle. A publishing company, Houghton Mifflin Co., also turned in good performance.
He said that while some investors like Houghton Mifflin as a possible takeover candidate, Eagle favors it for its improving fundamentals.
Some unexpected buy-outs included Eckerd Corp., which was bought by J.C. Penney Co., Red Lion Hotels Inc., which was bought by Doubletree Corp., and PHH Corp., which was bought by HFS Inc..
Looking ahead, Eagle portfolio managers still like Precision Drilling, Genesco and Houghton Mifflin, as well as Claire Stores and International Speedway.
Paradigm Capital Management, Albany, N.Y., returned 41.1% for the year with its small-cap value style, ranking it ninth.
John T. Mastriani, president of Paradigm, said the firm uses a bottom-up style and all research is done in-house.
"We focus on an underfollowed and out-of-favor companies across a variety of industry sectors," Mr. Mastriani said.
Companies that performed well in 1996 include Tuesday Morning Inc., Tyco Toys, Donnelly Corp., CDI Corp. and Greenwich Air Services, he said.
The 10th-ranked firm was INVESCO Realty Advisors' real estate investment trust portfolio, which returned 39.8% for the year. For the quarter, the REIT portfolio was first with 20.3%.
Joe Rodriguez, director of REIT management and research for Dallas-based INVESCO Realty, said while its REIT holdings were relatively well diversified, the firm benefited from overweightings in the hotel, office and industrial sectors.
PIPER data are compiled by RogersCasey, Darien, Conn.